Asymmetric mobility of capital and people offers one explanation of why economic integration is affecting Hong Kong and the Mainland in different ways.
A university student I met briefly last week asked me an interesting question about why it is that the increasing economic integration between Hong Kong and the Mainland of China did not seem to be benefiting Hong Kong. He pointed to the contrast between the rapid economic growth of the Mainland - in excess of seven per cent per annum in real terms, and higher in Guangdong - and the poor economic performance of Hong Kong. I had difficulties in providing him with a succinct answer there and then. I did, however, in the time available, blurt out a series of possible reasons that left him rather puzzled and myself rather guilty for not having done better, time constraint notwithstanding. Since I do not even know his name, let alone how to get back to him, let me use this column to elaborate on the subject a little, in the hope that he reads it.
The financial turmoil of 1997-98 was I think one significant factor, in that it affected Hong Kong a lot more than the Mainland, given our openness and the free convertibility of our currency. A fixed exchange rate, however appropriate for our circumstances, is always a popular target for speculative attacks, and when these occur, the freedom and openness of our financial markets will translate the pressure into interest rate shocks that could be debilitating for the economy. Although the Mainland, de facto, also operates a fixed exchange rate, the currency is not freely convertible, and together with the controls on capital flows, it is well insulated from the risks of globalisation.
Another explanation is a statistical one. Intuitively, given the large amount of direct investments made by Hong Kong residents in the Mainland - Hong Kong's manufacturing sector has virtually relocated there - the return on such investments must have been substantial in view of the rapid economic growth of the Mainland. I suspect that this is a lot more substantial and increasing much faster than the return arising from Mainland investments in Hong Kong. However, what accrues to Hong Kong residents outside of Hong Kong comes into the estimates of gross national product (GNP) rather than those of gross domestic product (GDP) that we have been observing. (The use of the word "national" here is probably inappropriate in the circumstances of Hong Kong, but GNP is a common statistical term.) In other words, the growth rate of GNP for Hong Kong should be significantly higher than that of GDP.
What I think is the more important explanation of why the Hong Kong economy, in the geographical sense, has not benefited more from the rapid economic growth of the Mainland is the asymmetric mobility in capital and people across the two economies. While flows from south to north are virtually free, flows in the other direction are highly restricted. While investment opportunities in the Mainland, attractive as they are to Hong Kong residents, draw substantial capital from Hong Kong, investment opportunities in Hong Kong that are attractive to Mainland residents are largely out of bounds to them. While the mobility of Hong Kong consumers to the Mainland is free, it is only recently that this has been matched by some relaxation in the restrictions on tourist movements from the Mainland.
The economic integration between the Mainland and Hong Kong started from a position in which there was a large price differential, in terms of goods and services, and factors of production. The process inevitably involves deflation (including adverse but hopefully temporary impact on economic growth) in the high price economy and inflation in the low price economy. And given the relative size of the two economies, the inflationary pressure and the growth boosting effect in the larger Mainland economy would be less severe than the deflationary pressure and the growth dampening effect in the smaller Hong Kong economy. The asymmetric mobility in capital and people is having the effect of intensifying this contrast. The process will continue, with implications for price levels and short-term growth prospects until equilibrium is reached. The equilibrium may still involve a significant price premium for Hong Kong over the Mainland that is justified by "one country, two systems", Hong Kong's sophisticated business and financial infrastructure, and so on. I have no way of estimating how long that process, which will be painful for some, might be. Lessening the degree of asymmetric mobility of capital and people across the border will help. The trick is how to achieve this without hasty financial liberalisation that may undermine monetary and financial stability in the Mainland.
Joseph Yam
28 March 2002
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